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IA, A-I merger may get a special tax dispensation
October, 16th 2006

The government may promulgate an Ordinance for according a special dispensation to the proposed merger of Indian Airlines and Air-India and allowing the new entity claim income tax benefits on carry forward of accumulated losses.

According to government sources, section 72A of the Income Tax Act allows accumulated losses and unabsorbed depreciation of a sick industrial undertaking to be set off against the profits of a healthy company after a merger. At present, the Act does not specifically extend the set-off benefits to airline mergers.

Accenture, a global consultant evaluating the proposed merger of the two airlines, had studied all options, including even a de-merger. Two of the options being discussed by the Indian Airlines and Air-India boards are: floating a third company, to which the assets of IA and A-I can be leased, and merging IA into A-I.

If a new company is floated, A-I and IA can retain their assets or even lease them to the new company at nominal rates, thus avoiding payment of stamp duty. For a merger, the two companies will have to go through the rigmarole of paying stamp duty to various states, where their fixed assets are located. A re-valuation of assets before merger is also bound to increase their value significantly, forcing the two companies to pay huge stamp duties.

The Ordinance will be particularly beneficial under the second option of IA merging into A-I. IA, the sources said, had accumulated losses of over Rs 800 crore and had huge unabsorbed depreciation. A-I, on the other hand, has a positive net worth of Rs 553 crore. If IA is merged into A-I, then A-I can claim tax benefits under Section 72A, if the Section is made applicable to a merger of state-owned carriers.

The sources pointed out that a special dispensation was given when Global Trust Bank was merged with state-owned Oriental Bank of Commerce. Appropriate amendments to the I-T Act by introducing Section 72AA in the Budget. Since there was a precedence, a similar dispensation for Indian Airlines merger with Air-India would not be difficult, they added.

Accenture has estimated the merger cost at about Rs 250 crore during the first two years. The sources, however, said it could be much higher if the salaries of the two airlines had to be synchronised and wage arrears taken into account.

The merged entity would be able to fly more sectors and have a wider network. Accenture has, however, not put a value to the benefits .

The ministry was likely to firm up an option within the next month or two, the sources said. Civil aviation minister Praful Patel is keen to complete the exercise in the current financial year.

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